Charlie Munger, the vice chairman of Berkshire Hathaway and longtime partner of Warren Buffett, is widely regarded as one of the most influential investors and thinkers in the business world. His views on banking, both critical and supportive, have shaped Berkshire’s strategy and investments in the sector over the decades.
Munger’s critique of banking practices
Munger has been vocal about his disdain for some of the practices and incentives in the banking industry, especially after the 2008 financial crisis. He has blamed the excessive use of leverage, derivatives, and complex financial products for creating systemic risks and moral hazards. He has also criticized the compensation schemes that reward bankers for short-term gains and encourage reckless behavior.
In a 2010 speech at the University of Michigan, Munger said: “The incentives in the banking system were so perverse that they ruined the civilization. And the people who did it were not bad people. They were good people. They had high IQs. They had fine educations. But the system, with its false accounting and its emphasis on trading profits, was so perverse that it ruined the people.”
Munger has also expressed his skepticism about the role of central banks and regulators in managing the economy and preventing crises. He has argued that the easy money policies and bailouts have created artificial booms and busts, and have distorted the market signals and prices. He has advocated for more discipline and accountability in the financial system, and for letting the bad actors fail.
In a 2013 interview with CNBC, Munger said: “I don’t like the idea of the government printing money and spending it. I think that’s a very dangerous way to run an economy. And I think we’re doing too much of it. And I think we’re doing too much of rescuing everybody who gets in trouble. I think we should have let a lot more people go broke during the last boom.”
Munger’s influence on Berkshire’s banking portfolio
Despite his harsh critique of banking, Munger has also been instrumental in guiding Berkshire’s investments in the sector. He has helped Buffett identify and acquire some of the most profitable and well-managed banks in the country, such as Wells Fargo, Bank of America, and US Bancorp. He has also advised Buffett to avoid or sell some of the troubled and risky banks, such as Citigroup, Goldman Sachs, and Bank of New York Mellon.
Munger’s philosophy of investing in banks is based on his understanding of the competitive advantages and moats that some banks have over others. He looks for banks that have low-cost deposits, loyal customers, efficient operations, conservative lending standards, and strong cultures. He also prefers banks that operate in niche markets or regions, and that have diversified sources of income.
In a 2011 interview with Fortune, Munger said: “We like buying good banks at fair prices more than fair banks at good prices. We’ve done very well by emphasizing quality. We’ve made more money that way than by buying cheap, lousy businesses.”
Munger has also influenced Berkshire’s banking strategy by introducing Buffett to some of the key executives and directors of the banks that Berkshire owns or partners with. For example, Munger was the one who recommended Buffett to meet with Brian Moynihan, the CEO of Bank of America, in 2011, which led to Berkshire’s $5 billion investment in the bank. Munger was also the one who introduced Buffett to Ajit Jain, the head of Berkshire’s reinsurance business, who is widely considered as Buffett’s possible successor.
Munger’s legacy and vision for banking
Munger, who is 99 years old, has left a lasting legacy and vision for banking, both as a critic and as an investor. He has challenged the conventional wisdom and practices of the banking industry, and has advocated for more ethical and rational behavior. He has also demonstrated the value and principles of long-term and value-oriented investing, and has helped Berkshire build a formidable and diversified banking portfolio.
Munger’s vision for banking is not based on blind optimism or pessimism, but on realism and pragmatism. He recognizes the importance and potential of banking, but also the pitfalls and dangers. He seeks to find and support the best banks, but also to avoid and expose the worst ones. He strives to balance the interests of shareholders, customers, employees, and society.
In a 2019 interview with The Wall Street Journal, Munger said: “Banking is a very peculiar business. It’s the only business where you can go broke and still be liquid. And it’s the only business where the government will come in and save you if you’re big enough. So it’s a very interesting game. And it’s a game that I find very interesting. And I think we’ve played it pretty well.”
